During the past decade virtual currencies, such as Bitcoin, Qtum, Litecoin and Ethereum, have become increasingly popular. They are currently used as both methods for payment and investment instruments. The emergence of cryptocurrencies led to a legislative vacuum that had to be replaced by adequate regulations.

The present publication focuses on Bitcoin (by far, the most popular virtual currency) taxation. Bitcoins substitute real currencies and have a real monetary value. This means that they can be converted into US and Australian dollars, Euros or any other virtual currency. Most Bitcoin transactions are anonymous and take place on the Internet. Bitcoins are not regulated and do not depend on backings from central banks and governments.

Even though under most jurisdictions the Bitcoin currency is not considered as legal tender, some taxation systems recognize its significance and the respective authorities have proposed a particular fiscal treatment. Below is a brief overview of methods for Bitcoin taxation in the USA, the EU, UK, Germany, Australia and Japan.

Taxation on Bitcoin in the USA

In collecting federal tax, the Revenue Service of the United States considers Bitcoin as property, not as a currency. All transactions with Bitcoin are taxed in line with the principles valid for property taxation. Therefore details on Bitcoin transactions need to be submitted to the Revenue Service for the purposes of taxation.

Taxpayers offering services or goods paid in Bitcoin are required to report the amount of gained Bitcoin in their yearly tax returns. Bitcoin value is calculated taking into account the fair value on the market in US dollars (exchange rate) at the time of receipt of the payment.

If the taxpayer is using the cryptocurrency as a capital asset (as investment property such as bonds, stocks, etc.), he/she should consider any taxable losses or gains. Taxable gains result from transactions where the received value in dollars is higher than the virtual currency’s adjusted basis. Alternatively, a loss results from transactions where the received value in USD is lower compared to the virtual currency’s adjusted basis.

In the United States, people involved in mining of Bitcoins (validating transactions and maintaining a ledger) are also obliged to pay taxes. In case of successful mining, they have to add the value of mined Bitcoins to their total annual income.

Failure to fulfil the tax requirements for virtual currencies can result in penalties. Compliance with the US tax regulations and accurate assessment of taxes related to Bitcoin transactions can be achieved through maintenance of detailed records.

Bitcoin taxation in The EU

In 2015 the highest court in the European Union (ECJ) determined that transactions in Bitcoin shall not be charged with VAT in connection to the legislative provisions for transactions in bank notes, coins and currencies as means for payment. Therefore the European Court of Justice considers Bitcoin as a currency rather than property.

Even though Bitcoin transactions are not subject to VAT, they may incur other taxes, for example on income or capital gains. Bitcoin is treated differently for the purposes of taxation depending on the EU Member State.

United Kingdom

The United Kingdom treats Bitcoin in the same way as foreign currencies. Bitcoin transactions are subject to the rules for taxation applicable to currency losses and gains. On the other hand, transactions with Bitcoin that are considered “speculative” may be exempt from taxes. The information on measures for tax enforcement connected to transactions in Bitcoin provided by the local tax authority (HMRC) is rather vague. It implies that such exchanges are to be considered on a case-by-case basis, depending on the particular circumstances and established facts.

Germany

Since 2013 the country has been treating Bitcoin as private money. Even though the virtual currency is taxable at a rate of 25 percent for capital gains, the tax is chargeable only in case the Bitcoin profit is accumulated in the course of 1 year after the virtual currency was received. Therefore taxpayers holding Bitcoin for more than a year are not liable for tax on capital gains. In this case, any virtual currency transactions will be considered as private sales that are non-taxable. In Germany Bitcoin is treated in a way similar to shares, stocks and other investments.

Taxes on Bitcoin in Japan

The country recognises Bitcoin officially as a method of payment. Since July 01, 2017 the currency is not subject to consumption tax. Japan considers virtual currencies as values similar to assets. As such, they may be transferred in a digital manner or used for payment. Therefore profit from trade in Bitcoin is treated as business income and generates tax liabilities for capital gains and income.

Bitcoin taxes in Australia

The country considers all transactions in Bitcoin or any other virtual currency as barter arrangements. The national taxation system recognizes Bitcoin as an asset generating capital gains rather than as a foreign currency or money. All Bitcoin transactions must be properly documented, recorded and dated. Received payments must be declared in Australian dollars in the same manner as normal income.

Personal transactions with Bitcoin are exempt from taxes if they meet the following conditions:

1.) the virtual currency is used for purchase of services or goods intended for personal purposes

2.) the transaction value is below 10 000 AUD.

Bitcoin exchange and mining for the purpose of conducting business is taxable as stock trading.

Conclusion

The legal framework determining Bitcoin taxation varies by jurisdiction. Some countries (EU Member States) perceive Bitcoin as a currency, while other (Australia, USA) recognize it as an asset or property. Then there are jurisdictions, such as Japan, that have adopted an intermediate approach and define Bitcoin as a value, similar to an asset.